The Erawan Group Public Company Limited (ERW) Earnings Call Transcript & Summary

Hi, everyone. Welcome to 2Q Analyst Meeting of the Erawan Group Public Company Limited. Today, we have management joining Khun Youssef El Khomri, President; Khun Apinya Ngamapichon, CFO; Khun Akana, Khun Angkana Sophonvit, Vice President of Financial Management; and Khun Jetiya Kitiyodum Executive Vice President of Accounting. Hand over to Khun Youssef.

Thank you. So good afternoon, everyone. Thank you for joining today's session for our second quarter review. So our agenda will be, as usual, we're going to go through a brief market update, and then we will present to you some of the performance and achievements for the quarter. We have a bit of an update on the development projects as well as the outlook for the remaining of 2026. So let me start with the tourism environment across our 4 operating markets. So the second quarter recorded a mixed tourism performance across the region. So as you can see, Thailand welcomed 6.6 million international tourists during the quarter, which was down 4% year-over-year. The Philippines was broadly stable, down 1%. Japan was down 5%, while Korea was a clear outperformer with an international arrival increasing of 20%. The main factor that affected the tourism environment during the quarter was the U.S.-Iran conflict. It created uncertainty and affected international travel flows, particularly during the months of March and April. During those 2 months, we've seen a clear slowdown of scheduled flights and also travelers from and through the Middle East. There is not only Middle Eastern travelers coming out from the region, but also all the business that was transiting to the Middle East, mostly from Europe and the U.S. was also affected to some extent. The conflict also affected at a lower extent our region flight capacity due to oil price. So we've seen a few airlines that reduced the number of flights, both domestically and regionally. But we believe that this impact was largely temporary. So we see currently with the trend that arrivals are coming back, flight capacity has normalized as well. So, so far, we've seen that we pretty much passed the difficult time from a travel impact environment. And also just to give you a bit of data from the Middle East. So in fact, during the crisis, overall, flights coming from the Middle East to Thailand was down around 19% in the month of April. In May, it was minus 1%. And in June, actually, it was above last year, plus 9%. So basically, the scheduled flight coming through to the Middle East to Thailand has surpassed last year so far, and we're seeing a very strong contribution during the current month from Middle East to Thailand. So very positive signs in terms of recovery from that specific market. I also would like to share more broadly, we're seeing stronger competition among destination in the region, particularly in the short-haul intra-Asia travel. So Vietnam, South Korea are getting a lot of traction. So they continue to perform in terms of inbound tourism arrival. So that said, demand of travel to Thailand, which is our core market for Erawan, remains very healthy and still has room to grow. And also with HOP INN platform that we have in the Philippines, Japan and Korea and also our expansion plan, Erawan is very well positioned to grow with intra-Asia travel. So even there is some level of competition, we still have a good exposure to those markets our HOP INN portfolio. Moving to our operating performance. So overall occupancy increased to 75%, so plus 1% year-over-year. Average room rate was at THB 1,681, down 2%, which was resulting in a RevPAR of THB 1,267, so broadly stable year-over-year. For the luxury economy portfolio, we delivered a RevPAR growth of plus 4% despite the softer international arrival environment. So China, India and the U.S. were the strongest growth market for us. during the quarter, which supported our occupancy level. However, from an ADR point of view, we've had a lot of pressure due to this lower demand in terms of driving rates, but occupancy were maintained. As for the budget portfolio, RevPAR declined 2% during the quarter. So this was primarily affected by foreign exchange translation from our overseas operation. But in local currency, we recorded a positive RevPAR growth of plus 2%, which we will touch on in the later slides. So overall, a very resilient, I would say, quarter despite all the macro environment and geopolitical issues. On the financial performance, our revenue grew 4% to THB 1.82 billion. Normalized EBITDA was THB 502 million, representing a 27.5% margin and a normalized net profit increased by 31% to THB 83 million. So looking forward, our priorities remain focused on 3 key areas: One, we need to expand further our market share from an Asian market. So as I mentioned earlier, there are cycles where we see new travel shifts in the area, but we need to make sure that our portfolio, we're able to capture all the key markets, especially China. So China this year, especially for the first half of the year has been very strong, and we expect that to continue for the remaining of the year. So -- and also other Southeast Asian countries. Along that, we are also focusing on reactivating our sales effort to capture the recovery from the Middle East market as well as Europe. So as I mentioned earlier, Middle East so far is very strong, and we are actually -- it's beyond our expectation. We see that the numbers are very positive, especially for the month of August. Our second priority is to regain our ADR positioning, especially after the weakness we experienced in the second quarter. So we will do that by repricing majority of our hotel as the travel demand and flight capacity continue to normalize. And third, maintaining our financial and cost discipline to grow margin and profitability further. So this is an overall summary of the market environment and our financial stats. And I will let Khun Apinya to cover in detail our financial performance. Thank you.

So moving on our hotel performance, starting from luxury, mid-scale and economy segment first. So in quarter 2, Thailand recorded 6.6 million international tourist arrival, a 4% growth -- a 4% decrease year-on-year. So this brings year-to-date arrivals to 15.9 million, also down 3% year-on-year. Against the Tourism Authority of Thailand, full year target for this year will be 34 million arrivals, and we have now reached 48% of that target. On a month-on-month basis, April and May tracked broadly in line with last year with a gap emerging in June, the key source markets behind this shortfall were India, Russia, South Korea with arrival down 3%, 6% and 33%, respectively. China, meanwhile, remained our top source market, growing 25% year-on-year. So turning next to our Erawan, how Erawan is capturing this international demand. So for Erawan key source market in terms of Erawan performance, our top 5 source market remain China, United States, Thailand, India and Singapore. So if we compare with last year, we saw increased contribution from China, U.S., Thailand and India. China growth was broadly across luxury, mid-scale and economy segments, while U.S. market growth has significantly outperformed the market, supported by U.S. corporate business that continue to be a key driver of luxury segment, while India, we saw a growth in mid-scale and economy segment. With that Source market contribution, let's move into our segment level operational performance. So in quarter 2 2026, overall hotel performance across the luxury to economy segment improved compared with last year, with RevPAR increasing 4%, driven primarily by 3% increase in occupancy, while the rate remained broadly stable. With improvement, the improvement was volume led, supported by continued conversion of group business in luxury segment and effective source market targeting economy segment. So China remained a key source market for all segments, contributing to occupancy growth and partially offsetting softer demand from Southeast Asia and Middle East. For the rate growth, it was moderately impacted by ongoing geopolitical uncertainty, seasonally softer demand in resort destination and heightened competition in Bangkok market. So looking at luxury segment compared with last year, Luxury segment recorded a 4% increase in occupancy, while the rate remained broadly stable, resulting in RevPAR growth of 6%. This volume-led growth was supported by company's continued focus on group business conversion, particularly within corporate segment. So U.S., China, Australia were key source market driving the demand growth during this quarter and helped offsetting softer demand from Europe and Middle East. Despite softer leisure demand, the segment maintained its great positioning, reflecting resilient demand and effective of our revenue management strategy. So reported occupancy also temporarily affected by a phased renovation of Grand Hyatt Erawan Bangkok, which commenced in May 2026 and limit the property to fully capture demand during this quarter, but our occupancy remained stable at 70%. For mid-scale segment, in quarter 2, the mid-scale segment recorded a 1% increase in rate, while occupancy remained stable, resulting in RevPAR growth of 2%. This performance was achieved despite heightened competition in Bangkok market, which pressured occupancy throughout the quarter. This segment benefited from effective targeting of domestic leisure demand and sustained contribution from corporate segment, led by strong performance of Holiday Inn Pattaya, while rate positioning was at selected Bangkok property support rate growth. China and India remain our key source markets, helping offset softer demand from Southeast Asia and Middle East. As a result, our segment maintained stable occupancy and delivered modest rate growth. Lastly is economy segment. So economy segment record 5% increase in occupancy, while the rate is stable year-on-year, resulting in a RevPAR growth of 7%. This improvement was occupancy led, supported by targeted source markets focusing on volume growth of China, India and United States. The segment key source market. Stronger demand across Bangkok hotel and city central locations provide further support for this quarter, while resort destination in Pattaya and Phuket experienced softer demand from Europe and Middle East markets. So overall, we can deliver RevPAR growth of 7%, the strongest RevPAR growth among all segments. Moving on to our financial highlights for this quarter. Overall, in Q2, total operating revenue for luxury to economy segment hotels and other business was THB 1,293 million, a 3% increase year-over-year, with EBITDA of THB 300 million, up 3%. For the first half of 2026, our total operating revenue reached THB 3,014 million, up 3%, while EBITDA increased to THB 913 million, up 4% year-on-year. I also want to highlight that we also maintained disciplined operating cost control, resulting in stable margin in Q2 and improving margin for 6-month basis. Having covered luxury to economy segment, now let's turn into budget segment, beginning with our hotel network expansion. In this quarter, our HOP INN network remained at 88 hotels across 4 countries, Thailand, Philippines, Japan and South Korea. Two new HOP INN openings in Thailand originally planned in this quarter have been shifted to quarter 3. However, we remain total opening for 9 hotels this year, reflecting disciplined project timing. As a result, the company's total portfolio spanning luxury, mid-scale and economy as well as budget hotels now comprise 106 hotels at the end of quarter 2. So with our network update covered, let's look at industry backdrop supporting budget segment. So in Q2, domestic travel in Thailand continued to expand. The total domestic visits reaching 72.5 million, a 2% increase compared with last year, supporting by underlying demand for budget segment, Thailand's overall economy also continued to expand. So the GDP growth expected to grow 1.7% year-on-year. This combination of steady domestic travel growth and economic expansion provided a supportive backdrop of our business segment during the quarter. For Philippines, domestic travelers accounted for more than 80% of the gain with over 70% of sales driven by leisure purpose, meaning that the segment performance is closely linked to domestic economic activities. In Q2, Philippines economy expand 2.8% year-on-year. And we see continued recovery of Chinese travelers further strengthening the tourism environment. For Japan, international arrivals totaled 10 million, a 5% decrease year-on-year with a month-on-month decline across all 3 months of the quarter. The top 3 source markets were South Korea, Taiwan and United States. Chinese tourist arrival declined 58% due to policy-related factors and international relations. Despite the softer tourism environment, HOP INN Japan sustained its performance by continuing to grow both domestic and international market, including Philippines and Canada. So lastly, Korea. As Khun Youssef mentioned earlier, this year was a very good year for South Korea. So tourism grew by 20% year-on-year, and it supports our full quarter operation of HOP INN Korea. Now let's look at how this market dynamics translated into our operating performance. So in Q2, HOP INN RevPAR in local currency basis grew 2%, driven by a 1% increase in occupancy and 1% increase in ADR, mainly led by RevPAR growth in Thailand and Philippines. So in local currency, RevPAR growth and same hotel revenue in Thailand and Philippines continue to grow 3% and 2%, respectively, while we saw Japan RevPAR declined 1% year-on-year, reflecting intensified rate competition following the dip of Chinese arrivals. But with this competition, RevPAR slightly -- only slightly declined from last year. Moving on to financial performance. Operating revenue from Budget Hotels amounted THB 535 million, 8% increase compared with last year, and EBITDA was THB 202 million, broadly in line with the same period last year. For the first half of 2026, total operating revenue reached THB 1,070 million, a 10% increase year-over-year, while EBITDA increased to THB 424 million, up by 5% year-on-year. Even though this quarter, we -- our performance was pressured in Japan, and we also got impact from Thai baht strengthening, our margin remained healthy at 37.8%, so in a high level. So with both segment covered, now let's bring company performance. So the company recorded normalized total revenue of THB 1,828 million, a 4% increase compared with the same period last year. Normalized EBITDA amounted to THB 502 million, up by 1% with a normalized NPAT totaled THB 83 million, a 31% increase from the same period last year. So this is primarily driven by lower finance costs. After accounting for onetime prepayment fee of THB 11 million related to early loan repayment, undertaken as part of company's capital structure management plan to reduce long-term financial costs, reported NPAT was THB 72 million, a 14% increase compared to last year. In terms of the first 5 months -- the first 6 months of our performance, company record normalized revenue of THB 4,084 million, a 5% year-on-year increase. Normalized EBITDA was THB 1,337 million, up by 4%, while normalized NPAT was THB 472 million, a 16% increase year-on-year. So -- after accounting for onetime prepayment fee of THB 24 million related to early loan repayment mentioned earlier, reported NPAT for 6 months was THB 448 million, 10% increase year-over-year. So now let's turn into our balance sheet and financial position. So we continue to expand our balance sheet conservatively as committed, ensuring we remain our financial flexibility and capacity to fund future growth. In terms of interest rate positioning, at the end of quarter 2, our average cost of funds stood at 2.9%, reflecting our continued effort to refinance at lower cost of funds. As previously communicated, we intend to rebalance the part of our debt portfolio by increasing proportion of fixed rate borrowing, allowing us to lock in attractive rate and reduce exposure to future rate volatility. So we have already added 7% fixed rate exposure into our portfolio, and we will continue to build on this going forward. In terms of capital structure, our leverage ratio stands at 1.2x, significantly below our covenant limit of 2.5x, and it will help to -- us to expand further if opportunities arise. We also completed the refinancing of our certain facility this quarter to secure more competitive funding. As a result, the impact of prepayment costs incurred in the first and second quarter is expected to be no longer material from the next quarter onwards. So finally, let's close with project development and outlook. To Khun Youssef.

Thank you, Khun Apinya. In terms of project development, I would like to give you an update on the Grand Hyatt. So we're currently under renovation since the month of May, and that will continue until the second quarter of 2027. Overall CapEx estimated is around THB 500 million. We looked at the -- the areas to be renovated are obviously the rooms, the ballroom. So these are the 2 areas that we invested the majority of the CapEx on. The garden villas that are located on the pool side are already completed and are actually selling. In terms of rooms, we're doing floor by floor. We expect to complete around 70% of the inventory by December this year. And then the remaining would be done in the second quarter last -- next year. So overall, we decided to speed up the renovation as the market was soft. So we decided to increase the number of rooms to be renovated and take advantage of the market softness. Our aim for this renovation, I mean, primarily, of course, is to remain competitive and relevant in the market. One of our key priorities is to reposition the hotel ADR. So we are aiming at around 10% to 15% ADR increase post renovation and also, of course, regain a leading position in the concept. Also, one of our key focus is to regain our leading position in terms of event space. So the ballroom renovation is very critical, of course, for us to reactivate F&B performance overall. And we will show you some of the renovated areas later on for you to have a sense of where we are aiming at. We have some visuals just to share with you for maybe the one that will not be able to join the tour later on. So these are the standard guestroom renovation. We also have different room types. We have suites and other rooms that we're having different design on, but this is the typical room that you're seeing here. This is the Garden villa. We have 5 villas of such, which are located on the pool side, and we'll be able to show you that as well. So this is some of the work that we're having there. So very, very modern and refreshed. And for the ballroom, also, it's fully refurbished. And so the ballroom is a critical part of -- for the hotel because a lot of the business also from the room side is driven by the ballroom and events, right? So I think it's very critical for us to have a new ballroom, fresh ballroom that can be able to convert business and support not only food and beverage, but also the room revenues. In terms of outlook, we -- starting with the guidance. So we've revised our guidance for the year from the prior meeting. So our group target is that the new one is at plus 6% for the year. Break it down from luxury economy at 5% growth and in budget at 10%. The main reason for this reduction of forecast is due to the second quarter impact. So that's where we had a bit of a challenge, but we expect the next 2 quarters to show quite a good growth from the prior year. If we look at Q3 specifically, the business start to get better from the third week of July onwards. So even the first 2 weeks of July were not -- were still somehow impacted. August is very, very strong. September will be a bit softer because it's very -- it is a softer period for Thailand in general, historically. And then, of course, Q4, we expect to have very strong performance. And currently, the pace of the booking is very positive for Q4. So this is our latest forecast for the year. Again, the tailwinds and where we see the business going, I think the main factor will be the Chinese market continued recovery. So this will be a key driver for the performance for the second part of the year. The Middle East market as well, we expect to see a strong contribution from Middle East for the remaining of the year. And of course, generally, the airfare prices that are normalizing, that should help overall demand as well as the flight capacity normalizing to the region. Some of our key operating strategies. So we will continue to focus on our expansion. So we have another 6 HOP INN hotels to open this year as well as continue to look for new opportunities of growth for the company. Product enhancement. So this year, the key focus, of course, is the Grand Hyatt Erawan renovation to make sure that we do that successfully, and we relaunched the new product into the market in a very strong way. Rates is also a very key focus for us, especially coming out of Q2, which was challenging to reposition our hotel pricing and drive ADR again. And of course, the last focus will be on the cost discipline, making sure that we protect margin and we continue to grow our profitability. So these are the overall guidance and operating focus for the remaining of the year.